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Business Articles from the MakingIt! Digest:

Business Articles aimed to equip and guide you down a successful business path

Business Insight and Beyond

New! 5 Tips for Successful Business Financing

So you are ready to take the plunge and go into business for yourself! But like many entrepreneurs, you are finding the amount of money it takes to get a business off the ground both mind-boggling and discouraging. For many, getting a bank loan is not a viable option, nor is running up bills on high interest credit cards. In fact, the Small Business Administration estimates that 95 percent of company start-ups are backed by a patchwork of savings and personal loans.

There's no doubt that borrowing money from friends and relatives could be stressful and risky. While there are over seven million outstanding loans between individuals at any given time in the U.S., according to the Federal Reserve Board, the rate of default on these person-to-person loans is fourteen times higher than that of bank loans.

1. Document the loan terms. Handshakes are never enough. Relationships can be ruined due to misunderstandings about loan terms. If you don't write down the terms in a promissory note, future investors and creditors will also be wary.

2. Use a fair interest rate. Lenders will be much happier about forgiving payments now and again if they feel that the interest rate is fair. The IRS also may assume, depending on the terms and conditions of the loan, a rate of interest (Applicable Federal Rate) on a no-interest loan to a friend or family member.

3. Avoid balloon payments. Balloon payments or lump-sum payments at the end of the loan term are very risky for both borrower and lender. Borrowers inevitably cannot save enough to make the balloon payment and lenders inevitably cannot tolerate renegotiating the loan at the end of the term.

4. Remember the tax benefits It is tempting to avoid formalizing loans among friends and relatives, but there are tax benefits to using a formal promissory note. If the borrower cannot pay back the full loan amount, the lender is entitled to a tax deduction as "bad debt" - but only if the loan was formalized.

5. Enjoy the flexibility The ability to change loan terms, make an occasional late payment, and react to changing life circumstances makes flexibility the bedrock of loans among friends and relatives.

Source: icbs.com e